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Life Insurance for a Commercial Mortgage

If you’ve been looking for a new business property, then you might want to look into getting life insurance to protect your commercial mortgage. If a commercial mortgage is placed in your name for the business, whose responsibility is it to pay off if you were to pass away?

Chances are, you’ve already explored your options for obtaining a commercial mortgage and have an idea of where you want your business to be based. Perhaps, your company is growing, or you’re fed up with paying for expensive rent. Either way, getting a commercial mortgage may make good business sense for you. Which is why it makes even more financial sense to get that mortgage protected with a life insurance policy.

Why would you want to buy a property for your business?

There are a number of advantages that come with owning your own property for the purposes of the business. It can provide greater freedom for your business and the escape from expense rates and avoid being at the mercy of landlords. Interest rates can be fixed on commercial mortgages, whereas rents can quickly go up each year. It’s an investment, that can make money for you in the future. However, often with a property comes a hefty commercial mortgage and rates, which need to be considered carefully before entering into. Especially, when a lot is at stake.

Key considerations when getting a commercial mortgage

Essentially, with a commercial mortgage, you’re tying up business capital that could be used for other things. If you have debts and other loans that may need repaying, you limiting your amount of cash available. It can also mean if something goes wrong you could lose the property or the business. There are other disadvantages, such as the difficulty to move. So when obtaining a property, it’s important to think about which direction your business is likely to go. Commercial mortgages typically require a larger deposit than personal mortgages as well, so your business will need some capital behind it before embarking on such a commitment.

What happens to the mortgage when you pass away?

When getting a commercial mortgage, you’ll need to carefully consider all scenarios in order to protect yourself and the business. If you’ve signed, co-signed or even guaranteed a mortgage, who gets left with the payments if you were to pass away before it is paid off? Can these people afford to pay off the mortgage or meet the fees to transfer the mortgage? Or will they be left in a lot of financial trouble?

To counteract any possibility of putting others in a difficult financial situation, a lot of people take out a personal life insurance policy to cover their mortgage. This protects their family and ensures the property can be kept and paid off in the event of their death. Getting a commercial mortgage should be no different. By setting up a life insurance policy, you can have the money paid back into the business so that the company isn’t forced to sell off assets or the company property gets repossessed.

Without such a policy in place, you need to think of the outcomes that could affect those around you. Is there someone that will pay off the mortgage or negotiate a repayment plan with the lender? When getting life insurance for a commercial mortgage, you can really consider those possibilities and get appropriate cover in place.

Sole Traders – protect your family

When you’re a Sole Trader or in a Partnership, it’s especially important to take out a life insurance policy on a commercial mortgage. This is because you don’t have a business entity that can absorb the costs, the debt will fall into your estate. If a commercial mortgage needs to be repaid, then the responsibility will fall to your family. By protecting your business, you are protecting your family too. With a partnership, the company is automatically dissolved on the death of one partner, so, not only will the business end, but there’ll be a substantial amount of debt to pay off too.

Limited Companies and Limited Liability Partnerships

For limited companies and limited liability partnerships, commercial mortgages may be taken out by the business in the business name. However, normally there is a shareholder, partner or director that has signed the deed. Whilst the commercial mortgage can give the business more freedom, it still can be repossessed if you pass away and payments aren’t met. If the business doesn’t have spare cash to renegotiate mortgages, transfer it over or pay it off, then it could be in trouble. Safeguarding the business by having a contingency plan in place can really help. When several individuals are involved, you can cover each person’s liability. This can ensure all situations are counted for and the business is protected.

Small businesses and life insurance

For startups and small business, the loss of an owner or director can be massive. If there is a commercial mortgage on top of this, it can cost the business dearly and the business may be forced to sell. This can put employees out of jobs, cause the business to lose clients and profits, force the sale of assets or close down the whole business. If the funds aren’t there, when the proprietor was to pass away, it can have a long-lasting negative impact on the whole business. Not to mention, their family too. It’s even more important for a small business to take out life insurance to protect those around them. In fact, more cover should be taken out rather than just commercial mortgage protection to ensure the whole businesses is protected.

What can the life insurance pay-out be used for?

A life insurance policy that is taken out can help to pay off the commercial mortgage, if required. It can also pay for the cost of transferring the mortgage to someone else, changing contracts over and. giving the business time to sort out the necessary requirements without adding pressure.

When a business can’t reach its financial commitments, it can cause an impact on the rest of the business. With insecurity over whether the business will be able to continue running, it can cause demotivation amongst employees, loss of clients, decrease in reputation and loss of profits. If the business is unable to pay off or transfer the repayments, they may have to sell off assets.

In the event of a claim, the money can be used to protect employees so they don’t have to worry. It can also give the business time to recover and make any changes. A policy such as this can also help the remaining shareholders make necessary changes for mortgage repayments and to keep the business running. As a result, the business runs as normal and clients and profits remain the same. It can also help to protect the family if the debt were to be passed to them. Money can go to the family to pay off the mortgage, so they have time to grieve.

Who is responsible for the mortgage?

When obtaining a commercial mortgage, it may not just be one individual that has the responsibility. Shareholders or owners can be jointly or severally liable for a commercial mortgage. It all depends on how it was set up. Before arranging life insurance, each individual’s liability needs to be understood. If you are jointly or severally liable, the life insurance payout can go to the remaining shareholders. They can then transfer your part of the mortgage into their name. If the responsibility solely lies with you, you can pay it back into the business. The money can then be used to transfer the mortgage to someone else’s name or pay off the mortgage entirely.

Higher fees with commercial mortgage

Protecting a commercial mortgage, unfortunately, is more complicated than a typical mortgage on your home. This is because there are higher fees and interest rates charged by the lenders. When calculating what your business can afford, these fees and rates need to be considered. There may also be exit fees if the business wishes to sell the property earlier than originally agreed. When calculating how much cover you need, these fees can be incorporated into a higher payout.

Indexation

With commercial mortgages, interest rates can be fixed or floating. Therefore, your cover will need to reflect this. Market rates have a big impact on commercial real estate, so it may be worth looking at an indexed policy. This type of policy, although increases in premiums each year, also ensures you have enough cover. A higher payout is then paid out to reflect the economic situation.

Term life insurance for commercial mortgages

As you are looking to cover a commercial mortgage, term life insurance is probably a better option. Term life insurance can be taken out anywhere between 5-30 years to cover the mortgage. Once the mortgage is paid off, the need for insurance is no longer needed and the policy can then end. Typically, business owners take out around 5-10 years worth of cover. This can ensure the mortgage is paid and gives the business time to grow.

Decreasing term cover

As the mortgage decreases over time, the cover amount can decrease too. With decreasing cover, the premiums stay level each year. With increasing or level cover, premiums can become more expensive. The type of cover you get depends on your particular circumstances. It can reflect your businesses ability and affordability to pay off the mortgage. When setting up a policy, your advisor can help determine which option is best for you.

Life and critical illness cover

Owners can also have the option to take out critical illness cover in addition to life. For example, if they were to become seriously ill and unable to work, they can pay off the mortgage or meet mortgage repayments. It can give the individual time to heal, rather than worry about meeting financial responsibilities. Furthermore, a critical illness cover can help to meet medical payments if required. If the owner wishes to leave the business, they can also use the payout to transfer the mortgage.

Where does the money go?

Ultimately, it is your decision where you would like the money to do. If you are a Sole Trader you are likely to want the money to go to your family. For larger businesses you may want the money to go to the remaining shareholders, so they can take over the mortgage or pay off your part. With commercial mortgage life insurance policies, you can also get the insurance provider to pay the money straight to the lender. Whichever way you set it up, the money should go to the people that will be responsible after you pass away.

A commercial mortgage life insurance is tailored to your requirements. It ensures that the business does not have to close should you pass away and that your employees and family are all protected. To find out more about life insurance policies to cover your commercial mortgage, you can start by requesting a free, no obligation quote.

£203,000 of Business Protection cover for £10 per month/£2.50 per week is based on 30 year old non-smoking male over a 15 year level term with AIG. Quote correct as of 31/03/2016.
Key Man Insurance quote of £8.79 per month is based on 30 year non-smoking male with £200k of cover over 10 years with Legal and General. Quote accurate was of 6th April 2017
Relevant Life Policy quote of £8.94 per month is based on 28 year old non-smoking female with £175k of cover over 15 years with Legal And General. Quote accurate as of 6th April 2017
Business Life Insurance quote of £2.31 per week is based on a key man policy of a 31 year old non-smoking male with £200k of cover over 15 years with Legal And General. Quote accurate as of 6th April 2017
Business Life Protection quote of 32p per day is based on a relevant life policy of a 27 year old non-smoking male with £225k of cover over 10 years with Royal London. Quote accurate as of 6th April 2017
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